October 25,
2008 "Information
Clearinghouse"
-- Things
are getting
worse. On
Friday
morning,
futures
trading was
halted for
the first
time ever
after
futures
plunged more
than 5
percent. The
sell-off
came after
another
500-plus
down day on
the Dow
followed by
steep
declines in
equities
markets
across
Europe and
Asia.
Japan's
benchmark
index, the
Nikkei,
slipped more
than 9.5
percent
after Toyota
and Samsung
reported
disappointing
earnings.
The news was
equally bad
in Europe
where shares
were
battered
across the
continent on
fears of a
global
recession.
Since
September,
$16 trillion
has been
erased from
global stock
market
value.
Losses in
the
US--where
the
financial
turmoil
originated--have
been much
smaller than
other, more
vulnerable
markets. The
Dow is down
less than 40
percent from
its peak of
14,000,
whereas Hong
Kong, Poland
and China
have all
tumbled more
than 60
percent. Its
a bloodbath.

The Chicago
Board
Options
Exchange
Volatility
Index, "the
Fear Index",
surged to
79.13 on
Friday, the
highest in
its 18-year
history,
while the
Dow clawed
its way back
from 500
points down
to a 312
point loss
on the day.
The massive
blow-off in
stocks is
mainly the
result of
ongoing
deleveraging
among the
hedge funds
which are
dumping
shares in at
a record
pace to
cover the
dwindling
value of
their asset
base.
According to
the New York
Times:
"Hedge funds
lost an
estimated
$180 billion
during the
last three
months and
some are
near
collapse.
Investors
are
demanding
their money
back, and
Wall Street
is bracing
for a
shake-out in
the $1.7
trillion
industry."
If a large
fund, like
Citadel,
goes down,
it will
create a
black hole
in the
financial
system,
similar to
the loss of
Lehman Bros.
and, once
again, the
US Treasury
will have to
come to the
rescue by
providing a
multi-billion
dollar
taxpayer
bailout.

The
dislocations
caused by
the
unwinding of
the hedge
funds
creates the
possibility
that US
markets will
have to be
closed while
assets are
dumped on
the market.
New York
University
Professor
Nouriel
Roubini
summed it up
like this:

"Policy
makers may
soon be
forced to
close
financial
markets as
the panic
selling
accelerates.
Indeed, we
have now
reached a
point where
fundamentals
and long
term
valuation
considerations
do not
matter any
more for
financial
markets.
There is a
free fall as
most
investors
are rapidly
deleveraging
and we are
on the verge
of a a
capitulation
collapse.
What matters
now is only
flows -
rather than
stocks and
fundamentals
- and flows
are
unidirectional
as everyone
is selling
and no one
is buying as
trying to
buy equities
is like
catching a
falling
knife. There
are no
buyers in
these
dysfunctional
markets,
only sellers
and panic is
the ugly
state of
this
destabilizing
game.

We have
reached the
scary point
where the
dysfunctional
behavior of
financial
markets has
destructive
effects on
the
financial
system and -
much worse -
on the real
economies.
So it is
time to
think about
more radical
policy
actions and
government
interventions."
(Nouriel
Roubini's
Global
EconoMonitor)

The stock
market rout
has
triggered
gigantic
swings in
the currency
markets,
too. The
dollar has
surged 16
percent
against the
euro in a
matter of
weeks while
every other
currency in
the world
has steadily
lost ground,
excluding
the yen. The
sudden fall
in
commodities
and the
unwinding of
dollar-based
bets in
foreign
capitals has
bolstered
the dollar
and made US
Treasurys
the
preferred
"flight to
safety"
investment.

The
volatility
is causing
problems
everywhere,
particularly
where
foreign
companies
must pay
back loans
in dollars
which have
risen
steeply in
relation to
their own
currencies.
Emerging
"commodities
based"
markets are
getting
clobbered.
The stronger
dollar also
threatens to
make it
harder on US
exports
which have
been the one
economic
bright spot
in recent
months. If
present
trends
continue,
then foreign
governments
will have to
allocate
more of
their
reserves to
prop up
their own
currencies
which will
make it even
more
difficult
for the US
to fund its
current
account
deficit as
well as the
Treasury's
expanding
balance
sheet. In
other words,
these
violent and
unprecedented
currency
swings
foreshadow a
funding
crisis
looming just
ahead as
credit is
drained from
the
financial
system and
capital
becomes even
scarcer. For
now the
dollar is
flying high,
but the
future is
looking
grimmer by
the day.

The
financial
crisis is
wringing
credit from
the system
and pushing
prices
downward
across the
board. No
asset class
has been
spared,
including
gold which
posted its
biggest one
week loss in
28 years and
has
plummeted
from $1,040
in March to
$734 at
Friday's
market
close.

Oil has also
been
hammered by
speculative
bets made by
the hedge
funds which
are now
forced to
sell their
positions to
cover
downgrades
on their
mortgage-backed
assets. The
erratic
movement in
oil prices
makes it
possible to
see the real
destructive
power of the
unregulated
market,
particularly
the opaque
buying and
selling by
the hedge
funds. In
just 14
months oil
went from
$70 to $145
and back to
$67 again on
Friday. Wall
Street
speculators
drove up
prices with
money they
borrowed
from the
investment
banks and
delivered a
knockout
blow to the
US consumer.
The Fed
played a
critical
role in this
"gaming the
system" by
providing
the low
interest
credit that
created
burgeoning
profits for
the
investment
class and
falling
living
standards
for everyone
else.

Now that the
currency
bubble has
popped, its
effects are
being felt
worldwide.
Countries
that
benefited
from the
high
commodities
prices are
now getting
slammed
everywhere
from Russia
to the
Persian
Gulf.
Ethanol
producers
are facing
bankruptcy
if things do
not
turnaround
in the next
12 months.
As the Wall
Street
Journal
notes:

"The tragedy
of the
second
bubble is
that it has
left the
economy in a
weaker
position to
ride out the
housing
slump and
credit
panic. The
American
consumer has
been
whipsawed
with $4
dollar gas
and food
inflation,
while entire
industries
have been
put on the
edge of
bankruptcy.
Detroit's
auto makers
have spent
the last
year taking
down their
truck and
SUV assembly
lines while
gearing up
to make
hybrids and
electric
cars, even
as their
cash flow
has been
ravaged.
Their new
investments
are based on
the
expectation
that oil
will stay
high
permanently,
but will the
market for
hybrids
exist if oil
is $50 a
barrel?

As Congress
plumbs the
causes of
our current
mess, the
main one is
hiding in
plain sight:
Reckless
monetary
policy that
did so much
to create
the credit
mania and
then
compounded
the felony
with a
commodity
bubble and
run on the
dollar whose
damage is
now becoming
apparent."
(Wall Street
Journal)

The effects
of low
interest
rates and
credit
contagion
are not
limited to
"bottom
line"
considerations.
As
Marketwatch's
Thomas
Kostigen
points out,
monetary
policy can
be a death
sentence for
poor people
across the
planet who
are
invariably
it biggest
victims:

"The harsh
reality of
the economic
fallout
isn't that
Joe the
plumber
can't buy
his business
or that
people's
retirement
funds are
being lost
or that
unemployment
is rising;
the harsh
reality is
that people
will die.

Already,
since food
prices began
to rise 100
million more
people have
been pushed
into
poverty,
according to
the World
Bank, with
as many as
two billion
on the verge
of disaster.
Almost half
the world's
population,
let's
remember,
live on less
than $2.50
per day.
Millions die
annually of
hunger and
starvation,
and more
than a
billion do
not have
access to
fresh water.

These
numbers are
poised to
rise
dramatically
with
population
growth,
dwindling
natural
resources
and higher
consumer
prices
across all
goods and
services. So
as the stock
market
tumbles and
the world
economy
falters,
it's
important to
remember
that it's
more than
financial
losses we
are talking
about, it's
the loss of
life.

And
increasingly
it isn't
just people
in far-off
places
around the
world who
are
succumbing
to such
extreme
hardships.
Note this:
Job losses
in the state
of Indiana
have caused
the child
poverty rate
there to
spike 29%
since 2000.
The wealth
gap in the
United
States and
around the
world is at
record
levels --
and it has
serious
consequences.

The
Organization
for Economic
Cooperation
and
Development
reported
this week
that the gap
between the
rich and the
poor is
getting
bigger
around the
world, and
that the
U.S. is
experiencing
the biggest
dichotomy.

We are
experiencing
the largest
wealth gap
in history.
Further
erosion of
the economic
floor will
only send
more people
plunging
into
destitution.

This is why
it's so
important to
fix the
economic
crisis --
now.

We're all
linked." (MarketWatch)

The Bush
administration
has called
for an
economic
summit to be
held by the
20 largest
economies
sometime
after the
presidential
elections.
US and EU
officials
are hoping
to stitch
together
another
Bretton
Woods
wherein
control of
the global
economic
system was
delivered to
those same
nations.
It's likely,
however,
that the
outcome will
turn out
considerably
different
than
anticipated.
Already,
under
China's
leadership,
12 Asian
nations have
agreed to
set up an
80-billion-dollar
fund to
protect
their
economies
from
currency-runs,
capital
flight or
other
financial
disruptions.
China has
the world's
largest
reserves at
$1.9
trillion
followed by
Japan at
more than $1
trillion.
Clearly the
two richest
nations will
set the
agenda and
play a
central role
in deciding
how best to
deal with
the global
recession.

The November
summit in
Washington
could
produce some
unwelcome
surprises
which were
hinted at by
Thailand's
Deputy Prime
Minister,
Olarn
Chaipravat,
who told
Bloomberg
News: ,

"The message
of this
initiative
is for China
to consider
whether or
not China
would open
up its
banking
system and
allow the
strongest
currency in
the world,
which is the
Chinese yuan,
to be the
rightful and
anointed
convertible
currency of
the world."

Surely, the
present
financial
malaise
which has
its roots in
Wall Street
and at the
Federal
Reserve, has
demonstrated
that the
dollar must
be replaced
as the
world's
"reserve
currency"
and that
America must
be deposed
as the de
facto
steward of
the global
economic
system.
Leadership
implies
responsibility
and the US
must be held
to account
for its
failings.
It's time
for a
change.

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